The offbeat personal finance blog for responsible people.

Don’t Get Caught Paying ‘The Stupid Tax’

Did you hear that in order to help pay for the United States’ recent passage of the multi-trillion dollar pork-barrel “stimulus” plan, the president just signed an executive order starting up a National Lottery with daily grand prizes of 50 million dollars? The winners will get $1 annually for 50 million years. — My variation of a very old joke

Lotteries are a tax on the stupid. Those words have been repeated so many times over the past several years that it is now cliche, but as an old junior high school history teacher of mine used to say, “it’s a true fact” nevertheless.

The other day I was talking with somebody who said that he was now redirecting $10 per week of his pay from his tax deferred retirement plan to the lottery. His reasoning was that the money he was putting into his retirement account was being lost almost as fast as he could put it in anyway, so why not take a small chance at becoming an instant millionaire?

“Yeah,” I said, “Maybe we should petition the company to offer us a Powerball option on our 401(k) plans.”

Lotteries are big business in the United States. Currently, all but six states permit them. In 2006 alone state lotteries had combined scratcher and powerball sales totaling $52 billion.

Yes, I understand that many folks’ 401(k) accounts have been taking heavy hits lately.

I also agree that the stock market can be very irrational at times. And unlike the stock market, playing the lotto is based on objective probabilities.

But just because the markets are being irrational doesn’t mean you have to be too.

The fact is, lotteries are probably the worst investment anybody can make. The big question is why lotteries continue to be so popular given the nearly insurmountable odds that players are up against.

Let’s look at the odds for Powerball, which is played across 30 US states, the District of Columbia, and the US Virgin Islands. In Powerball, there are 59 white balls of which five are drawn, and there are 39 red balls of which a single ball is drawn. Powerball advertises that players can win in one of nine ways. Sounds good, doesn’t it?

Well, here are the odds of winning each of nine ways:

Grand Prize (5 white balls/1 red ball) – 1 in 195,249,054

$200,000 (5 white / 0 red) – 1 in 5,138,133

$10,000 (4 white / 1 red) – 1 in 723,144

$100 (4 white / 0 red) – 1 in 19,030

$7 (3 white / 1 red) – 1 in 13,644

$7 (3 white / 0 red) – 1 in 359

$4 (2 white / 1 red) – 1 in 787

$3 (1 white / 1 red) – 1 in 123

$3 (0 white / 1 red) – 1 in 61 (odds are not 1 in 39 because of the risk you will also match a white ball)

The overall odds of winning Powerball are 1 in 35.

Anybody who regularly plays the lottery clearly doesn’t understand the sheer magnitude of the odds that they must overcome in order to win even enough to cover a luxury vacation.

Either that or they have too much money to begin with, don’t ya think?

For example, here are other interesting odds to consider:

Being dealt a royal flush on an opening hand of poker (1 in 649,739)

Being struck by lightning in your lifetime (1 in 30,000)

Dying in a car accident (1 in 18,585)

Getting a hole-in-one (1 in 5,000)

Being audited by the IRS (1 in 100)

Comparing the numbers, one can see that Powerball players have only a slightly better chance of winning $100 than being struck by lightning.

They also have a better chance of being audited by the IRS than winning $4. Although, one could also argue that any Powerball winner that manages to take home the Grand Prize has an almost 100 percent chance of being audited.

So let’s review one more time. The chance of a lightning strike ruining your day: 1 in 30,000. The chance of becoming filthy rich playing Powerball: 1 in 195 million.

Okay, so you can’t win the lottery if you don’t play. But with the odds of becoming a millionaire one in 195 million, I think it’s more realistic to say that those who don’t play, can’t lose.

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Comments

We have a national lottery here in the UK, and when I was working in an office they played a syndicate – every player in the office, except me! They would constantly hassle me telling me I couldn’t win if I didn’t “play” etc. just as you say above, but I’m a poker player so I understand odds. So what I started doing was filling out a fake lottery ticket each week – each week they would pick their numbers and play, and I would pick my numbers and NOT play – they had the odd very small win but lost almost every week, I pocketed my ticket price every week ðŸ˜‰

This really is the ‘stupid tax’. The odds of winning the lottery are not worth the money spent, but people continue to buy tickets. It is just human nature to dream and try to live that dream, no matter the cost.

I spend $6 per week on Lotto. I know the odds, and I know I’m losing about $300 a year but is money I feel comfortable losing. I stick to it and do not play any other type of lottery. Like I said before I know the odds but I still play because for me is more a form of entertainment… Is like playing in the casinos, you should only play an amount you are comfortable losing as long as you see it as a form of entertainment.

I understand the statistics, but the bottom line is somebody DOES win it. I play maybe 10 times per year when the powerball gets above 100 million and I buy 2 or 3 tickets. Do I expect, or really even hope, to win? Absolutely not. But, what I’m buying for that dollar is a small dream, a little shot at the big prize. Small price to pay for dreams.

You’re absolutely right, Brian. Even I’ll buy one ticket on rare occasions when the jackpot is really huge — like $300 million or more. I know I’m throwing my money away, but the dream is fun, if fleeting. The problem is, many many people don’t understand that and truly believe they have a reasonable shot at success.

The upfront cost is low and the payout very high. The chance of winning is bad, true, but with such a low upfront cost it really isn’t that terrible of a gamble. I lose $10 every once in a while when the jackpot is big? Oh well, not like I bet with a lot of money.

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